Porsche’s Financial Race With Ferrari Is Really No Contest - Bloomberg
https://www.bloomberg.com/opinion/articles/2023-12-20/porsche-s-financial-race-with-ferrari-is-really-no-contest
When Porsche AG sold shares last year, the German sportscar maker hoped to follow in the gilded footsteps of Ferrari NV and achieve a valuation more in line with a luxury-goods company rather than a metal-bashing automaker. Those dreams have begun to fray amid signs that Porsche is susceptible to an economic slowdown after all: The stock has declined around one-third since peaking in May, and now lies below the €82.50 ($90.75) offer price. An already sizable valuation gap to Ferrari has become a chasm.
Ferrari caters to the super-rich — as opposed to the merely affluent like Porsche — and is seen by investors as a safer port in an economic storm. To recover, Porsche must prioritize exclusivity and high sticker prices. Doing so may require it to forgo potential sales.
Due to their capital intensity, cyclicality and vulnerability to technological disruption — think EVs and driverless cars — most auto stocks aren’t highly valued by investors.
Despite its bona fide luxury credentials, Mercedes-Benz Group AG trades on just five times expected earnings, for example, a derisory level that also reflects worries that the high prices automakers enjoyed during the pandemic aren’t sustainable. Porsche now sits above Mercedes on 14 times earnings, while Ferrari remains a breed apart: thanks to its high margins, resilient demand and relatively low exposure to the lackluster Chinese economy, investors currently pay an earnings multiple of almost 50 times.
Porsche is still in decent shape, having achieved an 18% operating profit margin in the first nine months of this year. While that’s 10 percentage points lower than Ferrari, it’s still impressive by the standards of the auto industry.
However, Porsche is struggling in China, which accounts for around one quarter of its sales and where its deliveries slumped 40% in the July to September quarter. While the Stuttgart-based manufacturer recovered that shortfall by allocating more cars to Europe and US, it isn’t immune to the damping effect of higher interest rates on luxury car demand. In contrast, Ferrari has remained serene — the Italian firm has raised sales guidance twice this year, and says it is effectively sold out until the end of 2025.
Porsche’s reputation for manufacturing excellence has also been dented after it was forced to delay the launch of an electric version of its popular Macan SUV until next year due to software problems. The eMacan – one of several new models arriving in 2024 -- is poised to test Porsche’s vow to extract a 10% to 15% price premium for its electric vehicles compared to their combustion-engine versions. Lately, carmakers have been forced to discount EVs amid growing competition and consumer reticence about buying a plug-in ride.
So far, Porsche has declined to offer large sales incentives either on combustion or electric models, so anyone hoping to find the keys to a Panamera sedan or 911 sportscar underneath the Christmas tree may be out of luck. On average, Porsche’s US dealers are offering discounts of around 2%, according to Citigroup Inc., compared with as much as 8% at BMW AG and Mercedes. "We think this is the best way to protect long-term brand and pricing power, even if it means Porsche volumes stop growing for a year," Citigroup analyst Harald Hendrikse told clients last week. Porsche’s vehicle sales have increased almost 8% so far in 2023, but fell 7% year-on-year in November.
Porsche’s wobbles have reopened a debate around its purported brand exclusivity. Porsche sells more than 300,000 vehicles annually, compared with just 13,000 at Ferrari. The two companies are also miles apart on pricing – on average a Ferrari sells for around €368,000 whereas a Porsche customer pays less than one third of that. Investors are betting that higher interest rates will trouble the typical Porsche client far more than Ferrari drivers.
There’s a similar valuation gap in the fashion world: Investors pay a multiple of 50 times earnings for shares of Hermes International and Brunello Cucinelli SpA , whereas rivals trade at around half that level. The explanation is similar: Hermes customers vie to be invited to purchase one of its five-figure Birkin bags, just as ferraristi clamor for the right to purchase its sports cars. Meanwhile, cashmere king Cucinelli has upgraded revenue guidance several times this year.
Of course, there’s a dose of psychology and favoritism in automotive valuations — why else would Ferrari pick RACE as its stock ticker, while Porsche opted for P911 in homage to its iconic sportscar?. A fund manager’s bonus might not stretch to a Ferrari SF90 Stradale, yet they can compromise by owning the stock. However, investor sentiment can be fickle, and the prancing horse can’t afford any slip-ups: Ferrari has yet to prove it can master the shift to electric, for example, while Porsche’s electrification plans are far more advanced.
Porsche has an opportunity change the stock market’s negative view by launching new models without a hitch. Speedy central bank interest-rate cuts next year might also help revive sales growth. But for the time being, the sportscar maker may need to acknowledge an uncomfortable truth: a smaller, more exclusive Porsche is potentially a more valuable company.